If you’re selling your business, at some point you’ll likely be presented with a term sheet. As the name suggests, this document will include the “terms” of the deal including the basic economic terms and conditions of a prospective acquisition. It is a list of conditions to be met if the sale successfully takes place, yet it is not legally binding.
What is the Difference Between a Term Sheet and the LOI?
Both a term sheet and letter of intent (LOI) will include stipulations and lists for a buyer and seller to agree upon. The major difference is that the term sheet doesn’t require a signature, while the letter of intent does. In many cases, buyers are hesitant to sign before the due diligence stage. In this situation, you may find that the term sheet will precede the LOI.
How Lengthy are Term Sheets?
There is no standard model or form to a term sheet. Therefore, it may be as short as one page, or it could even be five or more pages. But no matter how many pages it may be, it should explain what is being purchased and a stated price. In some cases, the information in a basic term sheet will lead to a formal letter of intent.
What Components Should be Included?
In addition to the price and terms, a term sheet can include other considerations relating to the purchase of the business. For example, it can include employment agreements or non-compete clauses. They can also include conditions to be met upon closing. Often the term sheet will detail plans for the buyer to conduct due diligence and gain additional information. You can expect to find everything from warranties and lists of what is included in the sale to exclusivity clauses within term sheets.
One aspect of the term sheet that should not be overlooked is the method of payment. Typically, the payment sections are far more complex than just “cash at close.” Instead, they will describe a combination of elements including cash at closing, but also other forms of payments. In some situations, they will include details regarding a loan from the seller.
The term sheet is quite beneficial as it can expedite the sales process and prevent serious misunderstandings. As a result, this non-legally binding document can initiate a smooth beginning to a successful deal.
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Once you get to the stage of your deal where you have a signed letter of intent, you may already be feeling a sense of relief that your deal is near finalization. But remember that the due diligence stage is typically yet to come. This stage includes everything from financial and legal investigations to a review of specific information regarding how a business is run.
The due diligence process can be quite comprehensive and it often reveals some surprises. Because it is important for sellers to know what to prepare and for buyers to know what to look for, let’s examine some of the categories that are reviewed during this process.
Trademarks and Copyrights
Will assets like trademarks, patents and copyrights be transferred? This is a point that has certainly interfered with some deals being successful. Due to the fact that trademarks, patents, and copyrights are often essential parts of a business, they cannot be overlooked.
Products and Industry
Due diligence will likely include analysis of product lines and the respective percentage of sales that they make up. If the business in question is a manufacturing business, then all aspects of the process will be examined. For example, buyers will be looking for age and value of the equipment, information about suppliers, etc.
It goes without saying that financial statements should be poured over during due diligence. Current statements and incoming sales should be carefully reviewed. Review of financial information will also include balance sheets. Is there bad debt? Is there work in progress? These kinds of issues will be evaluated.
If you are selling a business, you should be prepared to share lists of major customers. Buyers may also want to compare your market share to that of your competitors.
Buyers should be looking for information on key personnel, as well as data on any potential employee turnover. If you are selling a business, it’s important to try to fix any staffing problems that might interfere with a buyer’s ability to properly run the business.
A key goal of the due diligence process is to find potential problems, such as liabilities and contractual issues. But on the upside, due diligence also includes investigation into assets and benefits. The end result should be that the selling price of the business is justified and both parties walk away satisfied. As stated above, it is very common for problems and issues to pop up during due diligence, so it’s important to stay proactive and be open to negotiation until the deal is finalized.
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Almost every sale of a business involves a high degree of negotiation between buyers and sellers. In this article, we share some of the questions you can ask yourself to prepare for this part of the process. After all, optimal outcomes are typically only achieved through proper negotiation strategies. Keep in mind that one of the key strengths possessed by Business Brokers and M&A Advisors is expertise and skills in negotiating deals.
Can Both Parties Split the Difference?
If the buyer and seller can’t agree on a number, one negotiating tactic is to have them split the difference. This is a tactic that is simple to understand, and it shows both parties that the other is willing to be flexible. This reveals a good degree of goodwill and can serve to not only keep both parties talking, but also lower any pre-existing tensions. When both parties are still at the table, there is still hope that a deal can be reached. This tactic serves to continue the discussions and can often be highly beneficial.
Can the Buyer and Seller Better Understand One Another?
When it comes to good negotiations, one of the goals is for both parties to seek to understand one another. Sometimes a buyer or seller’s needs don’t even involve the numbers on paper. Instead, they may be seeking to adjust terms to make them more conducive to their overall goals. If you can keep an open mind and seek to better understand what the other party is ultimately looking for, it can go a long way in making the deal happen.
Can You Bring in a Professional?
There is an old saying that says “Never negotiate your own deal.” One of the benefits of bringing in a brokerage professional is that this third party won’t have the same level of emotional investment. This means that he or she can keep a neutral perspective and be more apt to see things from both sides. Sometimes a new perspective can work wonders. Further, a brokerage professional will understand the myriad of complex factors that must be successfully resolved before the deal is finalized. A Business Broker or M&A Advisor will have tips and techniques that can only be gained from years of first hand exposure to making deals happen.
The post Questions to Ask When Negotiating a Deal appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Are you considering selling your business? Trying to sell a small business is difficult. Most sellers find it a difficult process, from the ﬁrst valuation and confidential marketing to buyer questions, myriad extensive research requests, and a bombardment of legal documents.
Although business owners understand how to run their businesses, they are typically inexperienced in the business sale process and haven’t spent time preparing.
Besides, good business brokers understand how to manage this process and can be valuable to owners.
There are many reasons why working with a business broker near me is a good idea. Here we look at seven ways the best business broker can help to sell a company.
1. Access To A Larger Market Of Potential Buyers
Selling your business through the services of a broker is much like working with a real estate agent to sell your home. When you hire a broker, they market your business while still maintaining a level of confidentiality you won’t get by posting your business on public websites.
Some details need to be concealed from the public as they can negatively affect customers, employees, etc. Thus, a broker will help you hide specific details such as business name, location, product, and services.
Furthermore, brokers have a wealth of market knowledge for your business type. They also have vast resources that include a personal network that can help you reach more potential buyers.
2. Determines The Value Of Your Business
Weighing the value of your business can be harder than pricing a house.
Every business is different and has many variables that may impact its value. But brokers have access to hundred databases that they can use as a reference point. A broker will value your business based on other similar businesses they have sold.
Also, a broker can value your business based on the income’ cap rates’, which is commonly used by commercial and real estate businesses. A broker can also utilize investment return rates, carry-back capability, historical cash flow, and amount of debt to determine the value of your business.
But the only way a seller will feel assured of the best deal is to get several bidders for the business. This scenario is possible with the resources professional brokers have.
3. Emotional Detachment
A broker as a third party is likely better positioned to negotiate a better deal with buyers.
Furthermore, most business owners have an emotional connection to their business, and negotiating their own business can be a traumatic experience. A broker will bring an objective perspective and help you see your business from the buyer’s viewpoint.
This will help you be more realistic in understanding the financial and economic factors that buyers also consider. Furthermore, the business must continue running during the sale process until the transaction is finalized.
Thus, you will have enough time to run your business.
4. Problem-Solving Experience
A broker will help in the managing of the sales process.
It is worth noting that the process of selling businesses is more complex than selling real estate. You will note that there are more steps in selling a business than a real estate business. Additionally, more problems need to be solved in the process.
For instance, a broker must determine the valuation, negotiate a price, keep clients financial and accounting records in order and go through the escrow before closing the sale.
Furthermore, a broker will facilitate buyers and seller meetings and interviews. The broker will also manage the meetings and provide timely and sequential information while resolving any conflict.
Additionally, the who process may belong, and a broker can spend up to 24 months building a referrals network.
5. Prepares Presentation To Potential Buyers
Before the negotiation, the business sale agent will prepare all your information to create a presentation that includes research documents and reviews. These documents show a brief overview of the business, its past, and the projected future performance.
Also, a broker will determine the right protocol for negotiation, which will depend on the number of bids.
Business transfers are not just about signing an agreement. There are fixtures, equipment, and others like intellectual property; a good broker can negotiate the value of tangible and intangible items.
Negotiation skills are important for a successful selling or buying of a business.
6. Assist Buyers In Accessing Financing
It has become more challenging to find small business purchase financing in the past years.
However, a broker can help a prequalified buyer get a loan. With their extensive network, brokers can also give feedback to potential buyers who can’t afford to purchase with their savings about their viability to get a loan.
A broker is simply keen on safeguarding every aspect of the deal to ensure a closing occurs.
7. Higher Selling Price
A broker will appealingly present the business to get buyers to pay the price you desire.
If a seller does not hire a broker, they won’t know how to manage competitive bidding and increase offering prices. Contrarily, if you hire an agent to sell your business, you are most likely to get a higher price than in a situation where you negotiate the deal yourself.
Hire A Business Broker Today
You might be an expert in running your business but fail to have the experience and skills needed to close a deal successfully.
Are you looking for an ST Louis business broker?
At Fusion Business Services, we are the best brokerage service with a fully integrated process to help clients understand their business sale and purchase options. We are totally confident about our in-depth planning session to help you make the best decision regarding your sale or acquisition.
Contact us today to boost the sale of your business.Read More
When you’re trying to sell your business, the last thing you want is to waste time dealing with buyers who aren’t qualified and are unlikely to actually make a purchase. After all, you will not want to reveal details about your business to someone who may be looking to take advantage of the situation. Let’s take a closer look at how you can weed out legitimate buyers from those who are just kicking the can down the road.
Legitimate buyers will ask the right questions. They will have a keen interest in your industry and are seeking to gain more information. They will also be likely to ask intelligent probing questions about your customer base and the strengths and weaknesses of your business.
The best buyers will also ask logistical questions about your inventory and cash flow. It goes without saying they will want to know details about profits that are generated. Real buyers will also be concerned about wages and salaries. Their goal will be to ensure that your employees are taken care of and will be unlikely to quit.
Another area that you can expect serious buyers to ask about is capital expenditures. They will evaluate any equipment and machines involved in the business. They will also likely inquire about inventory that is unusable due to the fact that it is outdated or problematic. After all, if they are truly planning to buy the business, they would inherit any headaches.
A good rule of thumb is to imagine yourself in the shoes of the prospective buyer. What kinds of questions would you ask? If you find that a buyer is only asking the bare minimum of questions that only scratch the surface, odds are that they are not really interested. You can expect the legitimate buyer to ask about everything from environmental concerns to details about your competitors.
The best way to evaluate buyers is to turn to the experts. Your Business Broker or M&A Advisor will have years of experience in talking to buyers and will have a leg up on evaluating who is worth your time and energy.
Further, you would likely be overwhelmed with the process of handling buyer inquiries while you are still trying to effectively run and manage your business. A good brokerage professional will handle your incoming inquiries and only notify you of buyers who are suitable, qualified candidates. They will ensure that the highest standards of confidentiality are held along the way.